Monday, May 16, 2011

The real estate stakes have been raised in recent weeks over e-commerce giant Amazon.com's decision on where -- and where not -- it plans to invest and open massive distribution centers, even as cash-strapped states consider legislation requiring Amazon.com and other "e-tailers" to collect and submit sales taxes on Internet purchases.

The online retail industry has fought skirmisheswith various states over the issue for several years, but the real estate and economic implications have taken center stage in recent weeks as Amazon.com announced its plans to open as many as a dozen shipping and fulfillment centers this year to meet growing global sales demand. Each of the new facilities would generate hundreds of new full-time jobs and hundreds more seasonal positions, along with other economic benefits for local economies.

The announcements come weeks after Amazon canceled plans for a fulfillment center in Columbia, SC, when a plan to give the Internet retailer a five-year break on collecting and paying sales tax failed in the state legislature. The center would have brought an estimated 1,250 jobs and a total investment of more than $100 million to Lexington County. Also, Tennessee state lawmakers are questioning a similar project in that state. Amazon maintains that an agreement with former Gov. Phil Bredesen prevents Tennessee from requiring it to collect taxes.

So far this month, Amazon has announced the following fulfillment center projects:

On Monday, Amazon announced plans to build a 400,000-square-foot expansion to its fulfillment center in Phoenix. When the expansion is complete, the Phoenix facility will total more than 1 million square feet, making it one of the largest Amazon fulfillment centers in North America. Amazon operates two other centers in the Phoenix metro area, bringing its total footprint in the state to more than 3 million square feet.

Also this week, the company announced plans to open its third fulfillment center in Indiana, a 900,000-square-foot facility in Indianapolis. With the project, Amazon’s footprint in the state would total about 2.5 million square feet, including existing facilities in Whitestown and Plainfield.

On May 4, Amazon announced plans to open a 500,000-square-foot center at the Sumner Corporate Center in Sumner, WA.

One of the first signs that Amazon was willing to shelve distribution projects over the issue came last year after the state of Texas in September issued an assessment of $269 million for uncollected back sales taxes from December 2005 to December 2009, including interest and penalties. The state alleges that Amazon should have collected sales taxes on those sales transactions, but Amazon countered that the assessment is without merit. Amazon announced it would close its distribution facility in Irving, TX and wouldn’t occupy any additional facilities in the state.

Companies have long sought to use the power of the purse to win continued incentives and favorable tax treatment. Sears officials recently said they may move their headquarters from Hoffman Estates, IL, where the company employs 6,000 people, to a state with better tax incentives. Sears is paying property taxes frozen at 1989 levels in exchange for providing jobs, but the incentive is scheduled to expire next year.

But the Amazon issue is interesting because of the rising influence of Internet retailing, combined with two sometimes competing forces: the desire of states and municipalities to attract jobs, economic development and revenue to fund budget shortfalls in a slowly recovering economy, and the leverage that companies have over competing states and jurisdictions in demanding incentives that cut into the tax base.

"On one hand, states are desperate for revenue, but there also aren’t many new buildings being built," noted Chris Macke, senior real estate strategist for CoStar Group. "Amazon has some leverage that way -- more so than they would have back when new 1 million-square-foot bulk distribution facilities were going up everywhere. It will also be interesting to see how long Amazon is willing to commit to leases in the locations."

For its part, Amazon relies on the wide geographic distribution of its vast fulfillment network, both within the U.S. and around the world. Responding to a question from an analyst last month about how "flexible" Amazon’s U.S. distribution network is in the event a state decides to require the company to collect taxes, Amazon Chief Financial Officer Thomas Szkutak said the retailer has "a wide range of fulfillment centers across a number of different states and geographies."

"Our operations team does a great job in terms of figuring out where the best places are to invest [are] and they'll continue to do that over time."

Amazon acknowledges the risks to its revenue and business model in disclosures published in public filings, most recently as part of its annual report to shareholders last month. The company noted that government regulation of e-commerce is evolving and "taxation risks could subject the company to liability for past sales and cause a decrease in future sales."

"We do not collect sales or other taxes on shipments of most of our goods into most states in the U.S. Under some of our commercial agreements, the other company is the seller of record, and we are obligated to collect sales tax in accordance with that company’s instructions. Our fulfillment center and customer service center networks, and any future expansion of them, along with other aspects of our evolving business, may result in additional sales and other tax obligations."

U.S. Supreme Court decisions currently restrict the company’s obligations to collect state and local sales and use taxes on sales made over the Internet, Amazon said. However, a number of states as well as Congress have considered or adopted initiatives that could limit or supersede the Supreme Court’s position regarding sales and use taxes on Internet sales.

"If these initiatives are successful, we could be required to collect sales and use taxes in additional states or change our business practices," the company said. "The imposition by state and local governments of various taxes upon Internet commerce could create administrative burdens for us, put us at a competitive disadvantage if they do not impose similar obligations on all of our online competitors and decrease our future sales."

A successful assertion by one or more states or foreign countries that Amazon should collect taxes on the sale of merchandise or services could result in "substantial tax liabilities for past sales, decrease our ability to compete with traditional retailers, and otherwise harm our business," Amazon said in the report.